San Joaquin College of Law

Community Property--Final Exam May 1994/Cartier

All the following events took place in California.

             When H and W married in 1979, H was the sole owner of Designco, an interior decorating business valued at $30,000. After marriage, H worked 60 hours a week in this business; W helped out by answering phones and balancing the checkbook. Despite the best efforts of both spouses, by 1983 the value of the business declined to $25,000. That same year W inherited $50,000 -- $30,000 of which was used as a down payment on a $100,000 residence with title taken in the names of "H and W, as tenants in common"; the remaining $20,000 was used to purchase a used Mercedes. While this vehicle was registered to "H or W," the parties orally agreed it was W's separate property.

             In 1989, H hired Val, an experienced interior decorator with an established clientele, to work at Designco. Profits immediately soared. Thereafter, H worked only 40 hours a week at Designco; W quit working there. In 1990, H traded the used Mercedes for a shiny new one, taking title in his name alone.

             In June 1991, after landing a contract with a client in a nearby city, H and Val decided to celebrate with a few drinks at the Faraway Bar. Half way through the first round, H asked Val if she would like to "continue the celebration at the Snuggle Inn?" She consented. On the way to the motel, H ran a stop sign and crashed into a vehicle driven by Vic, who sustained serious personal injuries in addition to the destruction of his vehicle. Vic sued H for $350,000. In order to settle the suit, H's insurance carrier provided coverage to the limit of the policy, $300,000. Vic withdrew $55,000 from an IRA account in his name to pay the remaining $50,000 and the penalties incurred for early withdrawal of I.R.A. funds. In order to secure his attorney's fees incurred in this matter, H signed a note, secured by a deed of trust on the family residence, in the sum of $15,000 -- $10,000 of which is still owing.

             At the Designco Christmas party in 1993, H asked Val if she wanted to cash in on her "rain check" for the Snuggle Inn. Val, who was now married, declined. In January 1994, she quit Designco and filed suit against H for sexual harassment. H moved out of the residence and filed for a dissolution of marriage on April 15, 1994. Except as specifically noted in the facts, assume that Designco was the parties' only source of income during the marriage.

W wants to know her rights and obligations regarding the following:

             1.          Designco, which is now worth $300,000? DISCUSS.

             2.         The family residence, with a fair market value of $180,000, subject to

                          a) the original loan which has been paid down to $60,000? DISCUSS.

                          b) the note and deed of trust signed by H to secure his attorney's fees?                                          DISCUSS.

             3.3.      The $350,000 paid to Vic and the penalties incurred for early withdrawal of funds                           from the I.R.A. account? DISCUSS.

             4.          The repaired 1990 Mercedes, now worth $25,000? DISCUSS.

             5.          Val's pending suit for sexual harrassment? DISCUSS.

Answer according to California law.

San Joaquin College of Law

Community Property--Final Exam 5/94 Sketch Answer/Cartier

1.          DESIGNCO, owned by H prior to marriage is initially characterized as his separate property. The value of this business increased from $30,000 to $300,000 during the marriage. To the extent this increase resulted from the expenditure of H's effort, skill and industry during marriage (a community asset), the community acquired an interest in DESIGNCO. The community interest may be fixed in accordance with the Pereira formula (H's sp investment + a reasonable rate of return as his sp, the balance as community property) OR the Van Camp formula (the value of H's services, less what community has already received, is community property and the balance is H's separate property). Although some commentators suggest the court should apply the formula that nets the greater return to the community, the court is free to apply whichever formula will achieve substantial justice. If the greater factor of the increase is H's efforts, courts tend to apply Pereira; if the greater factor is market conditions, courts tend to apply Van Camp. It appears that the greater factor in the increase in DESIGNCO was Val--a market condition? Note: W's efforts seem to be immaterial because there was no increase in value at the time she quit rendering services to DESIGNCO. Under California law, the decline in value during marriage is not considered in applying the Pereira/Van Camp formulae.

2.          THE RESIDENCE, with title held by H and W, a tenants in common, is presumed community property under Family Code § 2580; W has a tracing right to reimbursement to the $30,000 of her separate property inheritance applied to the cost of acquisition of the residence. The $10,000 pay down on the loan, made from monies taken from Designco, could be community property or H's separate property. To the extent that H's separate funds, if any were used to reduce the principal, he would also have a tracing right to reimbursement--under current statutory law. NOTE: This house was purchased in 1983, prior to the enactment of the current statute. At the time of acquisition, this property was actually "tenants in common," subject to equal division in a dissolution proceeding upon the request of either party. Under the prior law (as influenced by IRMO Lucas) separate property contributions were deemed gifts to the community (or to the other spouse) and so reimbursement would be denied (if current statute is unconstitutional).

             RE NOTE SIGNED BY H: Either spouse has the power to bind the community contractually. This indebtedness, incurred during marriage, is a community obligation. On dissolution, however, the court may assign this debt to H (at least within three years).

             RE DEED OF TRUST: Neither spouse can sell or encumber community realty without the written consent of the other spouse. The nonconsenting spouse has one year from the date of recording of the deed of trust to have the transfer set aside--assuming the transfer was made to a B.F.P. Since title was held by the names of the spouse's in a joint form, the attorney who took the deed of trust will not qualify as a B.F.P. The statutory attorney's lien (applicable in a divorce) does not apply in this tort situation.

3.          MONEY PAID TO VIC

             The $300,000 paid by insurance will be characterized according to the premium paid for the coverage and is not generally considered in determining interspousal liability. As between spouses, if the tortious activity was for the benefit of the community, the debt should be satisfied first from community funds and then from the tort feasor's separate property. If the tort was not for the benefit of the community, the order of satisfaction is reversed and the primary liability is on the tort feasor's separate property. A strong argument can be made that H's actions with Val were "not for the benefit of the community." Understanding the order of satisfaction of this tort liability, it next becomes necessary to characterize the funds in the I.R.A. While property acquired during marriage is presumed community property, if H can trace the funds in this account to his separate property interest in Designco, the funds in this account would be his separate property.

Put simply, if the I.R.A. is H's separate property and the tort was not for the benefit of the community, the debt was properly satisfied with separate funds. If, however, the debt was "not for the benefit" and the I.R.A. was community property, then reimbursement will be in order.

4.          1990 MERCEDES

             This vehicle was acquired during marriage and is presumed community property. The fact that title is in H's name is not dispositive since he chose to take title is his own name. The general community property presumption is rebuttable by tracing to a separate property source--W's old Mercedes. That vehicle was acquired in the names of "H or W"--(joint tenancy)--and spouses would generally be treated as equal owners of the asset and any separate property contribution to the cost of acquisition would be considered a gift. Here, however, H and W agreed that the car, purchased with W's separate property inheritance, would be her separate property. Based on this oral agreement, the old car was W's separate property. To the extent that this vehicle comprised part of "the cost of acquisition" of the 1990 Mercedes, W's separate property interest should be preserved. This interest would generally be figured based on the fair market value of the old Mercedes on the date it was traded in (or the trade-in received), without interest or appreciation. Here, however, H traded in W's vehicle. His unilateral action, would seemingly subject him to liability for interest in addition to the value of W's vehicle used for a trade. This liability is probably subject to a three year statute of limitations.

5.          VAL'S POTENTIAL TORT CLAIM

             The community is liable for the debts of either party "incurred during marriage," even if the claim is not perfected until after separation. The analysis regarding the "benefit of the community" applies here as it did to Vic's claim above. Upon a dissolution of marriage, W (unless she was personally liable for the debt--a situation that does not exist here)--will have no continuing liability for the debt to attorney (related to Vic's claim) or for Val's claim UNLESS assigned to W for payment by the court. Based on the egregious nature of H's conduct in regard to these matters, the court may assign each of the debts (potential debts) to H on an equitable allocation of debt theory.